Use of Game Theory to Maximize Profits in Southwest Airlines

Case Study: Use Of Game Theory To Maximize Profits

The following article describes the unique boarding process used by Southwest Airlines. Southwest Airlines boarding and game theory. Use this article and three (3) others to answer the following questions in 5–7 pages.

  1. Describe the change in Southwest Airlines’ boarding process. 
  2. What was Southwest’s main goal introducing the early-bird check-in?
  3. Explain how Southwest Airlines used the game theory approach to increase its profits.
    • What is the outcome of the game involving early-bird check-in?
    • Identify what is the passengers’ dominant strategy.
    • Determine why travelers face the Prisoner’s Dilemma with the early-bird check-in process.
  4. Analyze the advantages and disadvantages of the early-bird check-in process for Southwest Airlines.
  5. Suggest ways in which other companies, or the company you work for, can utilize similar game approach to maximize profits.

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The Use of Game Theory to Maximize Profits in Southwest Airlines

The Change in Southwest Airlines Boarding Process

            The boarding process in Southwest airlines has often been based on “open seating”, where travelers can seat in any available seat during the boarding process. Being a low-cost airline, the model of “open seating” is critical in the reduction of time at the gate, saving the company millions of dollars, thus allowing it to offer low-cost flights. However, over the past nine years has seen a change in the company boarding process. According to (Talwalkar, 2015) prior 2007, Southwest airlines offered flight services where its customers were allowed to board on first-come first-service basis. This created a dilemma as many people would camp out at the gate to have their favorite seats. This prompted the company to alter its boarding strategy, introducing the process of assigning travelers boarding groups.

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            The Southwest airlines introduced the boarding group numbers classified as A, B, and C. Those travelers in boarding group A would board first, followed by those in group B and then C. The traveler assigned the lowest boarding number within each group is allowed to board first. However, the ability to make a choice of individual favorite seat still remains in place (Talwalkar, 2015). Each member on boarding has the chance to choose a seat of their liking. The process of assigning of boarding groups and numbers is based on the time the travelers checks in at the company physically or through their online booking in the early-bird check-in.

The Main Goal of Southwest Airlines in Introducing the Early-Bird Check-In

            The introduction of the early-bird check-in system by the Southwest airlines was done so as to create prisoner’s dilemma through game theory by creating strategic behavior among its customers. According to (Robson, 2015) game theory is employed in the description and prediction of strategic behavior. The author notes that strategic behavior encompasses situations where one person is interested in taking into account how other people will behave in making theory decisions and the second person would also prefer to do it in a similar way (pp. 527). The adoption of early-bird check-in was designed to create strategic behaviors, which would in turn spur up demand for Southwest airline tickets. In order for a customer to have their favorite seat, then they have to make an early booking. However, (Talwalkar, 2015) notes that this would come at an extra cost of $10 to the customer. A customer can choose to forego and get a ticket at the gate, but this reduces their possibility of getting their favorite seat keeping in mind that there are many other customers who are willing to check-in online and book their tickets. This forces the customer to check-in online and book their ticket noting the behavior of the other customers and the desire to get priority sitting.

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How Southwest Airlines used Game Theory to Increase its Profits

            The use of game theory enables companies or firms to create conflicting situations. According to (Robson, 2015) the game theory utilizes the payoff matrix, which helps in the identification of strategies and possible payoffs to the consumers. In the case of Southwest airlines, the use of game theory is evident in the check-in system, where customers are advised to increase their chances of getting priority sitting by booking their flights through the company’s online boarding. The development of online boarding offered a new way in which the company would reap in extra profits through the additional online fees, but the exact source of increase in the company’s profits can be attributed to the game theory involving the use of the online-boarding.

The Outcome of the Game Involving Early-Bird Check-In

The Southwest airlines online boarding system offers an opportunity for customers to book their tickets for their favorite seats. However, there is no guarantee that making an online booking of the ticket guarantees a priority seat. There are two ticket allocation systems that the company offers, the early-bird check-in and the lottery seating. The early-bird check-in costs an extra $10 for travelers who wish to make online boarding. Since there are two options, the traveler can choose to forego the early-bird check-in and go for the lottery seating.

However, a traveler will be faced with a decision to make, to pay the extra 10 dollars and get priority seat or forgo paying it and go for lottery seating. Since the traveler is aware that many other travelers are competing to choose early-bird check-in, the traveler together with the other travelers are more likely to choose to pay the extra money and be in for a priority seat.  The outcome of the game is an increase in online boarding from travelers wishing for their favorite seats, which has driven their profits tremendously. Talwalkar (2015) points tha the company has seen rise in revenues owing to the early-bird checking system since the company is able to gain extra dollars they charge. This has seen the company make publications that early-bird check-in does not guarantee priority seating, owing to the numerous tickets it sells through the strategy.

The Passenger’s Dominant Strategy

            In game theory, the payoff matrix provides an indication of the payoff for each player for the combination of strategies that are adopted by the players (Hall & Lieberman, 2008). The dominant strategy is what is best for the particular person regardless of the choice of the rival. In the case of the Southwest airlines, the passengers’ dominant strategy is paying for early-bird check-in. Those travelers wishing to have best seats compete for the early-bird check-in and are forced to pay the extra$10 with the hope of having the best seats.

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Why Travelers Face Prisoner’s Dilemma with Early-Bird Check-In Process

            The early-bird check-in offers prisoner’s dilemma to the travelers since it offers possibilities for good seats at extra cost, yet it also does not guarantee that a traveler will get a good seat. What this means is that, a traveler using the early-bird check-in process will be faced with two options, whether to pay the extra $10 and be in for best seats or pay nothing and line up for lottery type sitting. The two options can be worth, since it is not a guarantee for best seat in making the online boarding and at the same time, using the online boarding at an extra 10 dollars could provide one with an opportunity for best seats, thus creating prisoner’s dilemma for the travelers using Southwest airlines.

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Advantages and Disadvantages of Early-Bird Check-In Process for Southwest Airlines

            The use of game early-bird check-in by the Southwest airlines has brought in positives to the company. One of the advantages of the use of the early-bird check-in is that it has allowed the company to reduce the costs associated with times spend by travelers at the gate while buying their tickets. The other advantage of the adoption of early-bird check-in is that it has increased the number of travelers that use online boarding process. This increase in the number of travelers who use early-bird check-in has allowed the company to increases its revenues due to numbers and the additional $10 for those who purchase their tickets through the process.

            Although early-bird check-in has produced benefits, the process offers some disadvantages. One of the disadvantages of the process is that it would lead to erosion of value of the process especially if a lot of travelers use it and they get bad seats as the airlines cannot provide good seats for all the passengers. Robson (2015) outlines the production of different equilibria as one of the major downsides of the use of the game theory, which can be a challenge to the users of the early-bird check-in process.

Ways in Which Other Companies Can Utilize Game Theory to Maximize Profits

            Game theory can be utilized by other firms in order to increase their profit margins. One of the ways in which a company such as Wal-Mart could use game theory to maximize its profits is to use change the perception of the consumers. One of the greatest challenges that retail store face is that most consumers are reluctant to buy new products but would rather wait for prices to drop so that they can buy them. One way in which consumers can be encouraged to buy more is to alter their perception by making the products seem “hot” and that they will run out of stock. The process has been employed by Amazon to increase its sales. According to (Goggin, 2018) Amazon created perceived shortage through its duped “Prime Day”, where consumers were offered products on limited offer within the company website. The strategy created high demand, allowing the company to sell all its products.

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The other way in which a firm can maximize profits using game theory is to use loyalty program. When one makes a purchase or signs up for a certain service, the individual is given reward points, which can be redeemed by the service user. Moreover, every time the individual uses the service, they are awarded more points making them hooked up with the service in the hope of getting more rewards or reaching the redeemable limits. According to (Dickler, 2018) Capital One Venture has employed the strategy to their advantage, which has seen many subscribers scramble for the company credit cards that offers rewards to those who sign up and make purchase using the cards. This has seen the company increase its sales, thus maximizing profits.

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